Who Pays the Taxes?

Economists should be spending their time studying the disincentives of the tax system, not its “fairness,” on which we have little professional expertise. Yes, you heard it here, economics really has nothing to say about whether “the rich” should pay more or less taxes — but we have a lot to say about what happens to economies that tax away the incentive to become rich, to study, move, start businesses, innovate, hire others, and produce great products along the way. But the (dis) incentives of the tax system are even more opaque, again deliberately. Not even every tax economist I have ever asked the question of can answer “what is your all-in marginal tax rate?” If it were clear, I suspect a lot more people would stop working!

He puts in an oar for a value-added tax. Value-added taxes have two main defects: they are largely hidden and they are terribly regressive. It is possible to correct the regressivity. For example, you could “prebate” the tax on a sliding scale based on income. That would also have the problem of eliminating the simplicity of the VAT. Not a single country with a VAT does this which I think should tell you something.

You could also prebate the tax without respect to income a la Andrew Yang. That reduces the regressivity while preserving the simplicity. IMO a VAT while intellectually appealing would be disastrous in the United States due to our low degree of social cohesion and the furtiveness of the VAT. It would also be catastrophic for state and local governments.

Canada has had a Federal VAT and Provincial VAT for at least 30 years — it has worked out fine.

The issues with VAT (beyond its very unpopular with consumers, ie everyone) are usually around what goods and services is included, and what is not. It would be an almighty lobbying fight to exclude items.

“very rich people tend to consume much lower fractions of their wealth than the rest of us. They take this “income” and plow it back into businesses and mortgages, where it is out there hiring the rest of us and producing products for us. ”

The economic consensus (his term) is more likely to be that incentives matter and people usually act in their own interest. So very rich people use their money to make themselves richer. It may or may not help anyone else here in the US. They may or may not use it in a socially useful way. For example, they may use it to invest in lobbying, obtaining tax expenditures, bribery or actions, including legislation, aimed at harming their competition or just eliminating them.

To me, the greatest disincentive has been that forced on non-breeders, who have to resist all those incentives to breed, including the tax table, property taxes for public mis-education, child tax credits, and general discounts for kids and babies. When has a kid ever been taxed to compensate for his role in global warming, pollution or public nuisance?

They take this “income” and plow it back into businesses and mortgages, where it is out there hiring the rest of us and producing products for us. ”

They may or they may not.

I don’t care whether rich people use their money to become richer. I don’t care if they use their money in “socially useful ways”. I do care that the earnings of rich people who are investing in new businesses, hiring people, and generally increasing the amount of economic activity are treated the same as the earnings of people who are putting their money into assets which don’t do any of those things.

I know that Guarneri scoffs at this but I think there’s a big difference between investing in building a new company and buying Facebook stock.

I also think that you exaggerate the degree to which the rich use their money for rent-seeking. Every source I have ever been able to identify puts the heavyweight champions of rent-seeking as organizations representing members of the professional class, labor unions, and a handful of activists and it shows. I do think that when Warren Buffett calls a Congressman, the Congressman probably picks up the phone.

“I know that Guarneri scoffs at this but I think there’s a big difference between investing in building a new company and buying Facebook stock.”

Either I’ve done a horrible job of expressing my view, or you are willfully ignoring a fundamental view I have expressed here many, many times.

The capital markets, which steve pathetically ignores in his comment, recycle capital every day. Else those with money consume, with its attendant benefits (or waste – heh, there’s a debate).

But how many times have I cited employment of risk capital vs somewhat risk capital vs consumption?? Um, every time this issue comes up on this blog.

People buying/trading Facebook stock are doing just that, trading. No new capital is invested. One can only speculate what people selling their Facebook stock do with the proceeds. Only if Facebook needs fresh capital and does an IPO is there additional risk capital. In any event, none of us is smart enough to dictate how these capital allocations should occur. Prescriptions and the prescription advocates should be ignored. Arrogant fools.

Fresh risk capital is a different story. Whether the PE business, or IPO’s, and I know this will irritate some, there are the people with balls, and those with none. Talkers, academics, pundits……..

I remember like it was yesterday joining my firm. I had at the time accumulated assets, but I was writing checks per deal in the $75K – $250K range. It could vaporize. It could double, triple, quadruple. It did all three. I’m going to go out on a limb. No one who visits this site would do same. Very few will. I know. I raise capital. They talk, but……

However, they sure do feel free to tell you, if you know what you are doing and actually create wealth, and capital gain, out of thin air, how you should be taxed. No balls, lot’s of tax advice……………..with other people’s money. And my point always is if you screw with this mechanism you will not be harming the Guarneri’s of the world. I fall above the economic line where I’m too rich to hurt. I fall below the line where Lizzy seeks to attract votes through envy politics. (In fact, I do not participate economically in our Firm’s Fund V – just advisory – because I am fed up with the nonsense.) However, you will be harming the people dependent on their jobs from business creation and growth. I call advocacy of such policies foolish, narcissistic and mean spirited.

Reading comprehension Drew. In response to the posted piece which claimed that wealthy people put all of their money into projects which make the rest of us richer, I showed it aint necessarily so, not that it doesn’t occur at all. I dont see the need to repeat Cochrane’s argument like you do. Go ahead and deny that the wealthy spend money on lobbyists or finance campaigns. Rumpr has it that sometimes wealthy people even hire the kids of politicians to be on their company boards to gain favor. Heck, they can even use that money to move companies to China. As a Trump supporter even you should acknowledge that hasn’t always benefited Americans.

“Every source I have ever been able to identify puts the heavyweight champions of rent-seeking as organizations representing members of the professional class, labor unions, and a handful of activists and it shows”

And that is why union jobs as percentage of total employment have dropped down in the private sector to about 7%? The problem here is that you are looking only at public records, mostly on donations. The wealthy can offer jobs to former politicians or to their kids. Put them on boards. Give them their business card. Purchase public media and think tanks to pursue advantage. How many cable TV networks do unions own? How many newspapers?

IMO only if ownership is concealed from the readers. The golden age of newspapers was when they were frequently slanted and/or party organs. They had an interest in uncovering corrupt practices of the opposing party because their opposite numbers did the same to their boys.

I wasn’t referring just to the cited part but to steve’s entire comment. Rolodex hires are a corrupt practice. They should be prevented or, at least, discouraged by law. One way to discourage it would be a substantial surtax on private sector wages for, say, five years following public sector employment.

Nice article looking at effects of concentrating the market into fewer large companies. Helps, partially, to explain why in the face of record profits we see declining investment, less productivity and a general loss of dynamism, but the rich getting richer.

I’ve been complaining about concentration throughout the life of this blog. One of my posts today touches on the subject.

Yet more evidence that increasing returns to scale are greatly exaggerated.

Note, too, that when you add the deadweight loss of big businesses to the deadweight loss of government, the total is something upwards of 20% of the entire economy. We could do a lot with 20% more economic activity.